Accidental Americans and US Tax Compliance: A Discussion with the IRS

Flott & Co. recently had the opportunity to discuss our proposal for changes to the existing IRS “noisy” disclosure programs (Offshore Voluntary Disclosure Program – OVDP – and the Streamlined Filing Compliance Procedure for Non-Resident US Taxpayers – Streamlined Process) with representatives of the Service. The discussion focused on encouraging the IRS to create a process modeled on the Streamlined Process for long term non-resident dual national US citizens, including those individuals who were born in the US to non-citizen parents or were born overseas to US citizens living abroad, many of whom did not know until recently of their tax obligations as US citizens.

Our major criticism of the current Streamlined Process is that qualification for the program focuses on the amount of tax liability and the nature of the tax return (simple or complex) instead of looking at the situation of the delinquent taxpayer. Even sophisticated, high-income individuals, who are unaware of the US’s unique taxation of worldwide income based on citizenship, have failed to file US tax returns and bank account reports.

We recommended that the Service shift the focus in a new program designed for this special group of delinquent taxpayers to likely culpability for non-filing. We suggested a questionnaire that concentrates on the taxpayer’s length of residence outside the US as well as the amount and nature of the contacts maintained by the taxpayer with the US since moving abroad. We used the term “Accidental Americans” to emphasize that these individuals are most often citizens in name only. Few, if any of them, have lived in the US for more than a few years, some not at all. Others were naturalized after studying in the US before returning to their native countries years ago without realizing that US citizenship comes with tax strings attached.

During the discussion, we reiterated our concern that social security numbers be required on the initial returns. Many Accidental Americans do not have social security numbers (SSN’s). The Streamlined Program requires an SSN so Accidental Americans without SSN’s cannot use it to comply with US tax law. An Accidental American may request an SSN from the Social Security Administration but this process is incredibly difficult and time consuming. We suggested Accidental Americans be permitted to file initially without SSN’s while navigating the Social Security Administration’s byzantine application process.

We found the IRS representatives genuinely interested in the proposal and the ideas presented. They acknowledged that taxpayers were under-utilizing the Streamlined Process and that the Service was seeking ways to encourage more taxpayers to use it. It is clear that the Service appreciates the situation of these Accidental Americans. It is just not clear if and when improvements such as we have proposed will be adopted. We will definitely continue to advocate for such changes and monitor developments.